North America’s macroeconomic and credit conditions will be shaped by the outcomes of the Federal Reserve’s monetary policy normalization, supply chain disruptions intensified by the Russia-Ukraine conflict, and the persistence of inflationary pressures.
S&P Global Economics expects the U.S. Federal Reserve to raise interest rates seven times this year, including a 50 basis point (bps) hike, and followed by four to five rate increases next year.
As companies are confronting higher input costs and supply disruptions that are expected to last until at least the second half of 2022, investors may soon start repricing risk. Geopolitical uncertainties may also burden trade, capital flows, market confidence, and business conditions. As these risks rise, growth in the U.S. is set to slow—and corporate borrowers may see remarkably favorable financing conditions come to an end, according to S&P Global Ratings’ second-quarter economic outlook and analysis of regional credit conditions.
Supply bottlenecks, higher prices, and the Fed’s sooner and faster rate hikes will likely trim 70 basis points from U.S. GDP growth this year, which S&P Global Economics forecasts at 3.2%, and 2.1% for 2023.
Whilst Canada’s GDP growth for 2022 at 3.7% is maintained by S&P Global Economics, considering that higher prices, interest rates, and the pressures of the Russia-Ukraine will weigh on growth in the following two years—with GDP softening to 2.6% in 2023 and 1.9% in 2024, from 2.7% and 2.1%, respectively.
“As the impact from omicron has lessened in North American economies, the Russia-Ukraine conflict has emerged as a preeminent risk creating both headwinds and uncertainty. But both the U.S. and Canada have buffers to weather the shocks,” S&P Global Ratings Chief North America Economist Beth Ann Bovino told the Daily Update.
“The overarching concern facing U.S. growth is extreme price pressures, exacerbated by the Russian-Ukraine conflict. The Fed has already indicated an aggressive tightening stance, betting that the U.S. can absorb the shock. While we see U.S. buffers will provide the cushion that the economy needs to withstand the Fed policy drag, we increased our U.S. risk of recession over the next 12 months to 25%, with a wide band given increased uncertainty. This is a concern for both the U.S. and its northern neighbor.”
Still, with heightened geopolitical tensions adding to already-heavy price pressures and supply constraints, and the Fed beginning to battle nagging inflation with what promises to be an aggressive cycle of monetary tightening, borrowers in North America may soon see the run of remarkably favorable financing conditions come to an end.
“We see a high risk that investors could soon demand significantly higher returns because of an escalation in the Russia-Ukraine conflict, the continuation of historically high inflation, or other unexpected adverse events,” S&P Global Ratings Regional North America Credit Conditions Chair David Tesher said in the report, published today.
“This could result in the repricing of financial and real assets, higher debt-servicing costs, and tighter financing conditions—which is especially concerning against the backdrop of high debt levels, and could hurt lower-rated borrowers in particular. Moreover, we think this risk will likely worsen in the next 12 months,” he concluded.